Olatunbosun: The Chinese Deal should not bother US, Europe

Mr. Posi Olatubosun teaches accounting and finance at the Birkbeck College, University of London. In this interview with KAMAL TAYO OROPO, he x-rays the rationale behind Nigeria-China economic deal

What’s your impression of this Nigeria-China economic deal?

Nigeria- China economic deal involves making Nigeria the West African hub for making the Renminbi (Yuan) available for international trade. Similar agreement had been signed between the Chinese and the South African government. As it stands now, whenever there’s a loss of confidence in the local economy, economic agents start buying the dollar in order to move their investments out of the country, thereby putting pressure on the Naira/Dollar exchange rate, and Naira depreciates as a result.

However, based on the new arrangement with China, investors can also move their investments around in other currencies, namely, Yuan, with effect from September this year when Yuan becomes international reserve currency like the dollar, pound and the euro. The deal is just to prepare businesses for making Yuan freely available, although, it takes effect in four to five months’ time.

To be specific, the deal makes a lot of sense for two major reasons: First and foremost, in the last five years, Nigeria has accounted for between 40 to 50 per cent of the West African trade with China. Also, in the same period, between 70 to 80 per cent of the volume of trade with China are imports, which means that the bilateral trades are tilted in favour of the Chinese.

Secondly and not any less crucial, Nigeria accounts for over 70 per cent of the Gross Domestic Products (GDP) of the ECOWAS countries, and has a relatively efficient financial and money market when compared to other sovereign States in the sub-region.

These are the business cases. Therefore, for such trading hub for Yuan to be sited here, Nigerian banks and other financial institutions can become the financial hub for the issuance of Yuan denominated securities, thereby deepening the Nigerian money and capital market.

Some people have talked about currency swap arrangement. But currently, there is no evidence of any such currency swap arrangement in place, either through the Central Bank of Nigeria (CBN) website, or through the Federal Ministry of Finance. Whenever such currency swap arrangement holds, I will be glad to explore it, as it is capable of saving us the pain associated with unplanned depreciation of the Naira.

If a currency swap were in place for example, economic agents would have the opportunity to trade with the other country based on the mutually agreed rate until the expiration of the swap, which is normally three to five year period.

But where does this deal leave Nigeria’s traditional Western economic relations; do you envisage a kind of backlash from US, for example?

Actually, the plan to diversify the way we trade in, and hold reserves in basket of currencies, has been in the pipeline for quite some time now. I remember that the former finance minister, Dr. Ngozi Okonjo-Iweala, once published such plans. Late last year, the International Monetary Fund (IMF) announced that the Yuan would, from this year, form part of its basket of reserve currencies (joining USD, GBP, Euro and Yen).

The business case for including Yuan is because, based on historical data generated from the global platform for providing international financial transactions, called SWIFT, the Yuan is now the fifth most-used currency for international payments. In addition, China is the world’s third largest exporter, although many have reservations about the currency, as it is not fully convertible in the market unlike the four well-established ones.

A closer look at available data indicates that based on global trade volume, Yuan come a distant fifth, representing 2.5 per cent. Not only that, a further analysis of the data showed that 70 per cent of all international Yuan transactions were consummated with Hong Kong, which is an outpost of China! So, if we shred the Hong Kong influence from the 2.5 per cent, then we’re left with 0.75 per cent, which is less than the global volume of trade in South Korean or Thai currency.

Therefore, at this stage, and based on the volume of world trade in Yuan, the USA, the EU and the UK wouldn’t be too worried about the quest by Nigeria to form any economic alliance with China. It can even be argued that the trickle-down effect would also benefit our traditional trading partners like the USA and the UK.

Considering that China is export oriented, while Nigeria is the reverse, what should we do to ensure that Nigeria does not come at the short end of the stick in trade?

As it is now, the volume of trade tilts in favour of China, and this oscillates between 70-80 percent per annum. It is high time the economy managers stressed the importance of import substitution strategy in trade with China, whereby, industrial concerns in China are encouraged to open a joint-venture, independent branches, associates or subsidiary business concerns in Nigeria, rather than continuous importation.

Sweeteners that can make this happen should, therefore, be offered to business concerns in China that would make them consider setting up in Nigeria, rather than export. For instance, Nigeria can offer a 10-year corporation tax holiday. President Buhari actually mentioned the need for Chinese businesses to invest in Nigeria during the last visit, but actual financial sweeteners that business owners can rely on must back up such pleas. Our ministry of trade and investment working in conjunction with the Nigerian embassy and the relevant Chambers of commerce should explore the ways of making this possible.

The government of Nigeria can encourage big Chinese companies to bring their expertise into the power sector, even if this will involve making financial guarantee by the Nigeria.

In October 2015, China state-owned power corporation was encouraged to invest in a new nuclear power station in the United Kingdom. The UK government backed up the project via loan guarantee up to £17b, in addition to a generous tax holiday. The deal will increase local electricity supply, and generate over 4,000 local jobs. There are also many business alliances between local UK manufacturers and Chinese investors. These are kind of win-win economic alliance that needs to be replicated in Nigeria in order to increase local investment and job creation.

Can Nigeria afford tax holiday, or sweeteners as you put it, in the name of import substitution, seeing that similar attempt with the West in ‘70s and ‘80s did not eventually lead to desired level of industrialisation; not forgetting that the country needs all the money it can get now.

There is a Federal Government tax incentive in place for such businesses, especially if the business is key to the economic growth and development of our country. Such companies can apply to the Nigerian Industrial Promotion Council (NIPC) for a ‘pioneer status.’ Such status, if granted, will give corporation tax holiday for the first three or five years of operation as the Council deems fit. This is backed by the Industrial Development (Income Tax Relief) Act of 1971, as well as the Pioneer Status Incentive Regulations Act 2014.

Although, the FIRS is under serious constraints to issue tax waivers at the moment, the practicality of granting such waivers are that they can be restricted to certain industries where there is need for massive investments e.g. power.

Secondly, these projects are capital intensive and if investors are not deliberately lured into them with tax breaks and sometimes government guarantees, things would remain the way they are.

Thirdly, the capital projects may yield marginal profits, or no profits at all at inception, and so granting them tax breaks may be expedient.

We must, however, note that corporations that are granted corporation tax breaks are not exempted from the payment of VAT on their sales, and deduction and remission of PAYE income taxes on the remuneration of their employees.